The research offers the first insight into the processes in the brain that
underpin financial decisions and behavior leading to the formation of market
bubbles. ... Although bubbles have been intensely investigated in economics,
the reasons why they arise and crash are not well understood and we know
little about the biology of financial decision behavior.

Researchers at the California Institute of Technology ... found that the
formation of bubbles was linked to increased activity in an area of the
brain that processes value judgments. People who had greater brain activity
in this area were more likely to ride the bubble and lose money by paying
more for an asset than its fundamental worth.

In bubble markets, they also found a strong correlation between activity in
the value processing part of the brain and another area that is responsible
for computing social signals to infer the intentions of other people and
predict their behaviour.

Dr Benedetto De Martino, a researcher at Royal Holloway University of London
who led the study while at the California Institute of Technology, said: "We
find that in a bubble situation, people ... shift the brain processes
they're using to make financial decisions. They start trying to imagine how
the other traders will behave and this leads them to modify their judgment
of how valuable the asset is. They become less driven by explicit
information, like actual prices, and more focused on how they imagine the
market will change. ...

Professor Peter Bossaerts from the University of Utah, a co-author of the
study, explains: "It's group illusion. When participants see inconsistency
in the rate of transactions, they think that there are people who know
better operating in the marketplace and they make a game out of it. In
reality, however, there is nothing to be gained because nobody knows
better." ...

The findings give the first glimpse to the decision-making mechanisms in the
brain that drive financial markets. Although they may not help to predict
the onset of a bubble, the research could help to design better social and
financial interventions to avoid the formation of future bubbles in
financial markets.

The research offers the first insight into the processes in the brain that
underpin financial decisions and behavior leading to the formation of market
bubbles. ... Although bubbles have been intensely investigated in economics,
the reasons why they arise and crash are not well understood and we know
little about the biology of financial decision behavior.

Researchers at the California Institute of Technology ... found that the
formation of bubbles was linked to increased activity in an area of the
brain that processes value judgments. People who had greater brain activity
in this area were more likely to ride the bubble and lose money by paying
more for an asset than its fundamental worth.

In bubble markets, they also found a strong correlation between activity in
the value processing part of the brain and another area that is responsible
for computing social signals to infer the intentions of other people and
predict their behaviour.

Dr Benedetto De Martino, a researcher at Royal Holloway University of London
who led the study while at the California Institute of Technology, said: "We
find that in a bubble situation, people ... shift the brain processes
they're using to make financial decisions. They start trying to imagine how
the other traders will behave and this leads them to modify their judgment
of how valuable the asset is. They become less driven by explicit
information, like actual prices, and more focused on how they imagine the
market will change. ...

Professor Peter Bossaerts from the University of Utah, a co-author of the
study, explains: "It's group illusion. When participants see inconsistency
in the rate of transactions, they think that there are people who know
better operating in the marketplace and they make a game out of it. In
reality, however, there is nothing to be gained because nobody knows
better." ...

The findings give the first glimpse to the decision-making mechanisms in the
brain that drive financial markets. Although they may not help to predict
the onset of a bubble, the research could help to design better social and
financial interventions to avoid the formation of future bubbles in
financial markets.